Consignment: Trust

The term commonly used to describe the contractual relationship between artists supplying their works to galleries for exhibition and possible sale is ‘consignment’. In business and legal terms, consignment does not mean selling work to a gallery, rather entrusting physical possession of work to the gallery as the artist’s agent with a view to sale – or return in sound condition if unsold (usually within a specified timescale).

If the gallery business fails and becomes insolvent, its assets are required by law to be liquidated to generate cash to pay business creditors. Do such ‘fire sales’ include selling artists’ works that have been received on consignment?

This is a perennial problem faced by artists whose galleries fail. As is the related problem of consigned works having been sold and released by the gallery (on receipt of the full sale price), but which then goes bust before paying the artist’s share. Bankruptcies of two respected and long-established galleries illustrate. Berry-Hill Galleries: a New York City-based dealership specialising in exhibiting and selling high-end American paintings and sculpture from 18th -20th Centuries, and contemporary American works; filed for bankruptcy in 2005, with over 100 creditors owed in total around $50 million. Salander-O’Reilly Galleries: also a New York City-based dealership, specialising in exhibiting and selling  European Old Masters,  modern and contemporary American works;  filed for bankruptcy in 2007, millions of dollars in debt. In both cases, the galleries had bought in some works for resale, thousands were received on consignment. Berry-Hill filed with over 100 creditors owed in total around $50 million. Salander-O’Reilly filed owing millions of dollars, including shares of proceeds of sales of their works to consignor-artists or their estates.

Major issues for each gallery’s trustee-in-bankruptcy -liquidator/administrator – to address were: identifying which works were not owned by the gallery, but by consignors; what money was owed to consignors from the proceeds of sales of their consigned works; and which consignors, if any, should be included as claimant-creditors in the bankruptcy proceedings. Strong arguments were advanced in proceedings by creditors, many of whom succeeded in refuting claims by consignor-artists and their estates. For example, in the Salander-O’Reilly case, the children of a recently deceased artist-consignor to the gallery chose not to finance a legal fight, but to buy back the consigned work from the bankrupt gallery.

In order to protect and advance the USA’s standing as the world’s market leader, 30-odd States enacted laws specifically regulating aspects of the art business; in particular the business relationship between artists (stereotypically the weaker business negotiating party) consigning their works to gallery dealers for exhibition and possible sale. The Berry/Salander bankruptcies shocked the art business world in the USA, especially in the country’s premier sales location: New York City. The cases exposed flaws in New York State’s 2006 Code for Arts and Cultural Affairs, especially provisions protecting artist-consignors and their estates. Accordingly, the Code has been amended: as from 6 November 2012 consignor-artists and their estates have much stronger protection against gallery dealers.

The Code’s new ‘art- art merchant relationships’ provisions use  language that speaks for itself; for example, in relation to artist’s consignments to dealers (and auction houses):
(i) such consignee shall thereafter be deemed to be the agent of such consignor with respect to the said work;
(ii) such work is trust property in the hands of the consignee for the benefit of the consignor;
These provisions make clear that the gallery (consignee) never owns the consigned work, and carries a solemn responsibility to look after it on behalf of the artist-consignor. Such a duty of trust and care imposed on the gallery is usually termed a fiduciary duty.
(iii)  any proceeds from the sale of such work are trust funds in the hands of the consignee for the benefit of the consignor;

Likewise, if consigned work is sold the gallery does not become owner of the money paid by the buyer; it holds such funds in trust for the artist-consignor. Such money cannot be used by the gallery as cash-flow to facilitate payment of its general overheads; this impels the dealer to pay the artist forthwith.
(iv)  such  work  shall  remain  trust  property notwithstanding  its purchase by the consignee for his own account until the price is paid in full  to  the consignor;

If the gallery buys a consigned work, the artist remains the owner of it until paid in full by the gallery. This provision goes on to say that if the gallery buys a consigned work, has not yet paid the artist and re-sells it, the proceeds of the re-sale (less any re-sale profit margin) will also be held in trust for the artist.
(v) no such  trust  property  or  trust  funds  shall  be  subject  or subordinate  to  any  claims,  liens or security interest of any kind or nature whatsoever.
This is what might be described as the Berry/Salander preferential rule: if the gallery has other creditors, they cannot claim against the artist-consignor’s trust works or funds to offset their bad debts. There are further provisions in effect preventing artist-consignors from signing away the new rights outlined above.

In practical terms, these new provisions require galleries to open a separate bank account in the artist-consignor’s name, not their own, for the deposit of sale proceeds (until paid to the artist). The Code makes it a criminal offence for a gallery to abuse an artist-consignor’s trust funds; penalty: up to one year’s County jail time. One particularly significant new provision extends artist-consignors’ statutory rights (and dealers’ fiduciary duties) to heirs and successors who inherit an artist’s estate (and therefore consigned works or proceeds of their sale).

UK and US Federal and State laws governing commerce have common historical origins, and are similar today in many respects. But, as we have explored, they differ significantly in the context of artists and their stereotypically weak negotiating power in the market place. The UK has traditionally adopted a laissez-faire approach to market regulation, especially the art business market: small fish are left to sink or swim; large ones left to dominate as they wish. That said, two particular areas of UK law might be used to good effect in the artist-consignor and gallery situation.

The general law of Agency places a strong legal duty on all Agents always to act in the very best interests of their Principals (those who hire them), to whom they must therefore demonstrate utmost loyalty and transparency. Such fiduciary duties of agents apply to gallery dealers when acting as agents for artist-consignors, and to auction houses when acting as agents for all sellers. The general law of Trusts might also be applied: where fiduciary relationships exist (such as a gallery dealer or auction house operating as a business agent to sell consigned works), the fiduciary holds such works or any proceeds of sale as a trustee on behalf of the consignor.
It would be sensible and good practice for gallery dealers to open separate bank accounts in the name of artists-consignors or, preferably to pay the proceeds of sale (minus any agreed commission) to the artist forthwith. Evidently in the USA, New York State in particular, such trade practices were not customary. Hence, the recent regulatory legislative provisions.

© Henry Lydiate 2013

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This article is from the Artlaw Archive of Henry Lydiate's columns published in Art Monthly since 1976, and may contain out of date material. The article is for information only, and not for the purpose of providing legal advice. Readers should consult a solicitor for legal advice on specific matters. Artists can get free online legal information from Artquest.